California legislation on PPP loan expenses

| 5/13/2021
California legislation on PPP loan expenses

On April 29, California Gov. Gavin Newsom signed Assembly Bill 80 (AB 80), which generally conforms to the federal income tax treatment of Paycheck Protection Program (PPP) loan forgiveness and of the deductibility of expenses paid with a PPP loan that is forgiven, with a notable exception. The California legislation generally requires a business to have at least a 25% reduction in gross receipts for both a first- and second-draw PPP loan. The current guidance provided for federal income tax purposes requires a gross receipts reduction of at least 25% to be eligible for a deduction of the expenses paid only with the second-draw PPP loan that is forgiven.

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The legislation does not include specifics, which presumably will be provided in guidance from the Franchise Tax Board (FTB). The FTB will need to address the following:

  • Will California follow the guidance provided by the Small Business Administration (SBA) and the U.S. Department of the Treasury that allows taxpayers to compare gross receipts in any 2020 calendar quarter to the comparable 2019 calendar quarter, or 2020 annual gross receipts totals to 2019 gross receipts totals?
  • If a business changed its entity form (for instance, if a limited liability company became a corporation) during 2020 from what is was during 2019, is it allowed to compare its 2020 receipts to its receipts from 2019?
  • What type of documentation is required to demonstrate that the 25% gross receipts reduction requirement has been met?
  • Are businesses that already have filed their income returns for a tax year ending in 2020 required to amend those returns?

Retroactive conformity

AB 80 retroactively conforms to the nontaxability of PPP loan forgiveness for tax years beginning on or after Jan. 1, 2019. Prior to this legislative fix, the law in California regarding the nontaxability of PPP loan forgiveness was applicable only for tax years beginning on or after Jan. 1, 2020.1

Economic injury disaster loan (EIDL) advances and targeted grants 

AB 80 also excludes from income EIDL advances and forgiven targeted grants and allows a deduction for expenses paid with an EIDL advance or targeted grant. There is not a 25% gross receipts reduction required for deducting EIDL expenses. The income exclusion does not apply to SBA subsidies paid on SBA loans, Shuttered Venue Operator Grants, or Restaurant Revitalization Grants. These subsidies and grants are subject to California income tax, but the expenses are fully deductible on a taxpayer’s California return.

  1 California Revenue and Tax Code Section 24308.6.

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